The shale-gas revolution has brought a new life in many sectors that were otherwise neglected by investors. Energy infrastructure (more commonly known as engineering and construction, or E&C) companies represent one such group. Given the abundant supply of natural gas, economists have suggested the government export some of it, which will not only bring foreign remittances but also help to maintain a balance between supply and demand of natural gas. In this situation, the most important question that is raised is which stocks should be bought in order to benefit from this theme?
Role of energy infrastructure companies in shale gas boom
When it comes to energy infrastructure companies and the shale gas boom, five areas of development are brought under discussion:
1. Gas processing – a process through which natural gas liquids (NGLs) are separated from natural gas
2. Fractionation – it is a process through which mixed NGLs like ethane, butane and propane, are separated into distinct products (and therefore brought into usable condition)
3. Petrochemical – abundant gas supply means cheap NGL supply and therefore cheap availability of ethane. Ethane is used to produce ethylene, which is then used as a cheaper substitute to naphtha and propane thereby providing cheap feedstock to the companies
4. LNG exports – building terminals/pipelines to export LNG
5. Gas power – basic infrastructure is needed to enable companies to use natural gas rather than costly alternatives like coal for energy production
Now that we have a brief idea of the role of energy infrastructure companies, it is important to shortlist the main beneficiaries.
Majority of the projects go to KBR
The resurgence of energy infrastructure spending in North America has become an investment theme in 2013, reflecting potential for a massive amount of spend across petrochemicals, gas-to-liquids (GTL), LNG, and gas pipelines. Industry margins are expected to continue to improve this year, reflecting better utilization and perhaps tighter capacity with North America now in the mix.
KBR, Inc. (NYSE:KBR) seems to be one of the main beneficiaries of the shale revolution given that it has been able to win the majority of the projects related to energy infrastructure development in all five fields mentioned above.
On an overall note, KBR, Inc. (NYSE:KBR) remains well positioned for a gradual ramp-up of earnings through the course of the year following the company’s 1Q 2013 results, highlighted by better execution/margin improvement. I am encouraged by KBR, Inc. (NYSE:KBR)’s prudent cost control in the quarter and think that management is doing a good job of containing the company’s recent execution issues.
I am also optimistic regarding KBR, Inc. (NYSE:KBR)’s better margin performance, especially in hydrocarbons, as lower margin projects (Escravos and Skikda) wind down and contribution from higher-margin Ichthys work continues to ramp up. For those who don’t know, Escravos is a project through which KBR, Inc. (NYSE:KBR) processes liquids from gas i.e. gas processing. Similarly, Skikda and Ichthys are projects of converting gas into LNG based in Algeria and Australia, respectively.